Author Topic: A.A. once you've "made it"  (Read 7085 times)

NorcalBlue

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A.A. once you've "made it"
« on: October 17, 2016, 08:27:20 PM »
Good problem to have, but I'm really struggling with deciding an appropriate asset allocation given my situation and hoping to get some opinons.  Here's where I'm at:

$1.4M "invested" NW
Current A.A: 65, 12, 3, 20 (Stock, Bond, REIT, Cash).  I know Cash is way to high - looking to get that allocated ASAP.
No debt, single
Renter
No debt
Age:  43
Currently doing some consulting - I'd consider myself semi-FIRE, with the intent of going full FIRE next year.
Basic needs expense budget:  $24k annually
Ideal Budget:   Expand it as much as possible without compromising my stache.  Not "mustachian" I know, but as long as I'm being "safe", I'd like to expand the budget as much as I can (lots of travel planned moving forward)

I've read it all.  Glide paths, 60/40, Golden Butterfly, 100% stock, etc. etc.  I'm planning to go full FIRE in 2017 and need to decide on an appropriate A.A. moving forward.  I will say that a VWR is appealing to me given my lifestyle.  If CAPE was in the mid teens, I think I would go 100% stock with a VWR @ 4% of the annual balance and be done with it.  But with a CAPE in the high 20's I'm having trouble pulling the trigger on that plan.  Sequence of returns also gives me pause on the 100% stock A.A. given CAPE levels.

Anyway, just hoping to get some thoughts on what fello mustachians might do given my situation?

I'm loving life right now and can't wait for next year to start the next chapter.  This is a great "problem" to have and I feel blessed. Thanks for your help.


« Last Edit: October 17, 2016, 08:52:26 PM by NorcalBlue »

lhamo

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Re: A.A. once you've "made it"
« Reply #1 on: October 17, 2016, 08:37:36 PM »
Congrats on the stash.  With basic expenses that low, you are pretty much made in the shade regardless of AA.  Especially if you plan to continue to work intermittently.

20% in cash seems WAAAAY too conservative, though.  I was planning to keep 2-3 years of expenses in cash, and thought that was a lot -- my Inner Bag Lady is a tough old broad, though, so I'm trying not to pick a fight with her.  You've got more than 10 years of basic expenses in your cash pot-- how long do you think that would last with added travel?  I would plan out the travel, including likely annual budget for that, and not keep more than 3-5 years in cash.  Most market downturns head back up after 2-3 years, so it is unlikely you'd have to sell on a dip.

NorcalBlue

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Re: A.A. once you've "made it"
« Reply #2 on: October 17, 2016, 08:44:25 PM »
Thanks lhamo.  Yep, the cash level is way to high.  I only recently (last year or so) learned about proper A.A., soI built up a huge cash reserve.  I've been working on getting it allocated (it was over 500k at one point).  Once I decide on the proper A.A., I hope to get it allocated by the end of the year.
« Last Edit: October 17, 2016, 08:53:09 PM by NorcalBlue »

lhamo

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Re: A.A. once you've "made it"
« Reply #3 on: October 17, 2016, 10:11:44 PM »
i know it differs from the oft-recommended jcollins index and forget it strategy, but I'm seriously considering putting a big hunk of our stash into Vanguard Wellington/Wellesley, which have pretty good dividend payouts and are less volatile than the straight index funds.   Lots of people over on the er.org forums like these funds.   If we set things up this way, our non-retirement stash should kick off about 50-60k in dividends per year, and since we won't have earned income we should be able to stay in the 0% tax bracket AND qualify for decent ACA subsidies on our nealth insurance.

Need to do more research over at bogleheads, etc. before I decide, though.....

Radagast

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Re: A.A. once you've "made it"
« Reply #4 on: October 17, 2016, 10:37:32 PM »
Too much cash and what percentage allocated internationally are the biggest two that come to my mind. I recently made the rule of thumb: at least 50% stocks, not more than 50% of total portfolio in US stocks, at least 10% but not more than 40% in bonds. As long as you stay within those guidelines you should get a reasonably good outcome.

misterhorsey

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Re: A.A. once you've "made it"
« Reply #5 on: October 17, 2016, 10:51:24 PM »
For some reason i read the title as 'Alcoholics Anonymous' once you've made it!


Metric Mouse

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Re: A.A. once you've "made it"
« Reply #6 on: October 17, 2016, 10:58:42 PM »
i know it differs from the oft-recommended jcollins index and forget it strategy, but I'm seriously considering putting a big hunk of our stash into Vanguard Wellington/Wellesley, which have pretty good dividend payouts and are less volatile than the straight index funds.   Lots of people over on the er.org forums like these funds.   If we set things up this way, our non-retirement stash should kick off about 50-60k in dividends per year, and since we won't have earned income we should be able to stay in the 0% tax bracket AND qualify for decent ACA subsidies on our nealth insurance.

Need to do more research over at bogleheads, etc. before I decide, though.....

I highly recommend those funds. Big Don Killbride fan.
« Last Edit: October 17, 2016, 11:12:46 PM by Metric Mouse »

MustacheAndaHalf

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Re: A.A. once you've "made it"
« Reply #7 on: October 18, 2016, 12:44:44 AM »
Current A.A: 65, 12, 3, 20 (Stock, Bond, REIT, Cash).  I know Cash is way to high ...
Not all 65% stock allocations are equal.  If you want to keep it high level, could you mention if you're invested in low-cost index funds?  And if you have some international exposure?

Cash earns about 0%, while bonds earn about 2% right now. 
I don't think the 3% REIT allocation is meaningful, but keep it if you like it.

Monkey Uncle

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Re: A.A. once you've "made it"
« Reply #8 on: October 18, 2016, 04:31:18 AM »
Congratulations on making it.  If I was in your shoes, I'd go 60/40 stocks/bonds, with the stocks diversified across countries and market caps, and the bonds in corporate/muni funds diversified across durations.  Or you could do 50/50 if you're really worried about a bad sequence of returns.  But really, you've got so much buffer that I don't think that's going to be a concern.  Your biggest problem now is deciding which charities will get all your millions when you die.

Frankies Girl

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Re: A.A. once you've "made it"
« Reply #9 on: October 18, 2016, 04:47:43 AM »


I have no idea what a golden butterfly is or what the CAPE is, nor do I care. I am an index investor and I like simple, low ERs and easy to manage, so I figured out an AA that I could live with, and invest in 3 very low fee index funds (plus a year's worth of cash) across about 9 accounts (not on purpose - mine, husband's and some inherited ones). I've been FIREd since spring of 2015, and the husband just joined me in the spring of 2016.

My current AA is roughly:

~70% - total stock market index
~15% - REIT index
~10% - total bond index
  ~5% - cash

So technically if you consider the REIT stocks too, I'm basically 85% stocks/15% cash/bonds. Works for me.

I don't see the point personally in going 100% into stocks as that just adds in more volatility and doesn't really help growth at that point as much, and I use the bonds and cash as my "leave it alone for a little while" buffer if things are on a downswing.


Good luck with however you decide to set your portfolio! :)

somers515

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Re: A.A. once you've "made it"
« Reply #10 on: October 18, 2016, 05:04:03 AM »
Congratulations!  With your low yearly expenses and sizable stash I agree with the other posters that any reasonable asset allocation will do.  I'm no expert but like you I've read a lot and one of the reasons to diversify away from 100% stock is not because you think stocks are overpriced but because even if an asset allocation has a lower long term return compared to 100% stocks, being diversified will allow you to safely withdraw more than a non-diversified portfolio.  I'm probably not explaining this concept very well but hopefully you get the idea.

Also I agree with other posters you should consider international exposure as well.  Unlike other posters on this site who seem to always diss having small percentages of certain asset classes, I don't see the downside, especially if you own Vanguard funds.  I like that you have 3% REIT as a renter and I would keep it.  Here's my current target portfolio:

50% US stocks
20% International stocks
1% REIT

17% US bonds
5% International bonds
1% Gold
6% Cash

I like having a little in cash right now.  So while I agree 20% is too high, you don't need to rush down to 0 either.  Perhaps consider DCA toward your target portfolio over the course of several months.  Enjoy!

DK

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Re: A.A. once you've "made it"
« Reply #11 on: October 18, 2016, 06:59:20 AM »
Considering *just* taking the stock portion, and figuring *only* a 3% SWR, you are kicking off more than enough for your budget....even changing nothing you should never have a problem in the future regardless if you retire right now and have comparable to the worst sequence of returns in history.

secondcor521

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Re: A.A. once you've "made it"
« Reply #12 on: October 18, 2016, 07:27:38 AM »
I'm 47, FIREd, and my withdrawal rate hovers around 3%, and I'm essentially using a blend of standard 4%-plus-inflation-WR and VWR.  My personal target AA is 90% stocks (VTSAX), 10% bonds (VBTLX), and 1-2 years spending in cash, and I don't worry if stocks::bonds is off by up to 2%.  I'm pretty close to where I want to be now at about 85/9/6.

But there is a lot more context to me and my AA beyond my age and WR.  My opinions on the economy, my family resources, my views on Social Security, my backup plans, my budget flexibility, my history up to this point in time, my kids.  You, and everyone on this thread, are also very different, and you really need to find out what you really believe and decide what you're comfortable with - polling people on the internet isn't going to find you your answer.  Well, I suppose it might, but only incrementally as you decide what you think about others AA and why.

I would add one other thing:  I think true investors have a plan that is mostly based on themselves - their risk tolerance, their resources, and their goals - and generally follow that plan over decades.  It is easy and tempting to ingest news, especially about worrisome or risky things, and react to those things rather than following the plan.  It is my personal opinion that reacting too much and changing one's plan too much as a response to temporary external circumstances is not as good of an approach as a solid, well-thought-out, reasonable plan that is followed over long periods of time - it certainly can mean more worry and stress and changing investments (which can result in increased taxes and transaction fees).  Personally I have had my plan in place for 30 years and have followed it and it has worked out just about as I expected it would - slightly better in fact.

Some people would say I have my head in the sand, and I understand and appreciate the criticism.  Each of us rolls our dice and takes our chances.

Good luck!

NorcalBlue

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Re: A.A. once you've "made it"
« Reply #13 on: October 18, 2016, 09:00:23 AM »
I'd just like to say thank you to all of you for your responses.  This is truly an amazing forum which is why I posed the question to you fine people.  I've gained so much knowledge from the people here (and JLCollins, GoCurryCracker, etc.).

A little more specifics on my A.A. after checking personal capital:

50% VTI
10% VXUS (all my current income is going into International as I look to grow my int'l exposure
7% (a mix of common stock, T, BRK.B, BAC, NOC - looking to unload these into index funds, but large capital gains loom.  Will wait until Fire and being in a lower tax rate before I unload them.
10% BND
3% VNQ (REIT
20% Cash (making 1% at Barclays)

The above is roughly split 35% Rollover IRA and 65% after tax brokerage.

Also, I'll have some inheritance coming my way in the next 20 years (although I hate to think about it), a small pension ($1k per month at 65) and a good chunk from Social Security.
« Last Edit: October 18, 2016, 09:03:13 AM by NorcalBlue »

AdrianC

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Re: A.A. once you've "made it"
« Reply #14 on: October 18, 2016, 10:05:29 AM »
I've not been impressed with the asset allocation tools I've seen so far.

Vanguard's says I should be 60/40. My wife got 50/50 on the same test.
https://personal.vanguard.com/us/funds/tools/recommendation

This book has one:
https://www.amazon.com/Smartest-Investment-Book-Youll-Ever/dp/0399535993
I get 40/60 from it. That's all questions answered for highest risk.

Here's a Bill Bernstein article I did like:
http://www.wsj.com/articles/how-to-tell-if-your-retirement-nest-egg-is-big-enough-1421726456

"If you’re of a certain age and have saved and invested well, it’s possible you’ve just now won the race. As such, this may be a good time to start reducing the risk in your portfolio.

You say you can’t abide the crummy yields in your now larger bond portfolio? Then cheer up: Those paltry coupons are the direct result of accommodative Federal Reserve policy, which has inflated the stocks in your portfolio. In plain English, if you have substantial equity exposure, you have far more assets than you would without Fed intervention, and the pile of fixed-income securities you can now buy with those equities will more than make up for their low yields."

We were 100% stocks for 15 years or so. A wild ride, but ultimately profitable.

Currently we're 80/20. Dithering about taking some more off the table.


Financial.Velociraptor

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Re: A.A. once you've "made it"
« Reply #15 on: October 18, 2016, 12:54:37 PM »
Curious if you have considered an allocation to single premium annuities?  Someone who does 20%+ cash is probably of the target mindset.

NorcalBlue

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Re: A.A. once you've "made it"
« Reply #16 on: October 18, 2016, 09:23:05 PM »
Curious if you have considered an allocation to single premium annuities?  Someone who does 20%+ cash is probably of the target mindset.

No I haven't.  My current cash holding (20%) is something I'm trying to get allocated.  It started at around 40% of my N.W. and I'm slowly getting it allocated during pullbacks.  My goal is to have less than 5% in cash within the next 6 months.

Tyler

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Re: A.A. once you've "made it"
« Reply #17 on: October 18, 2016, 10:32:16 PM »
Hi NorcalBlue.  Congrats on being in really good financial shape for early retirement!  I'm definitely not a financial adviser and picking an AA is a very personal choice, but here's one option to think about:

IMHO, building on your solid current foundation may be a more confidence-building plan than starting from scratch.  I'd also hate for you to incur unnecessary taxes by changing too much, so let's consider the 20% cash and 7% individual stocks as what we have to play with from a reallocation perspective.  Based on your current AA, it seems like you might be a Rick Ferri Core Four type of person and that extra 27% can easily get you there.  Perhaps you should read some of Ferri's work and see if that resonates with you.  If it does, then that's probably a good place to start and you can always make incremental improvements in the future as you learn more about your needs. 
« Last Edit: October 18, 2016, 11:07:47 PM by Tyler »

NorcalBlue

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Re: A.A. once you've "made it"
« Reply #18 on: October 18, 2016, 11:29:51 PM »
Hi NorcalBlue.  Congrats on being in really good financial shape for early retirement!  I'm definitely not a financial adviser and picking an AA is a very personal choice, but here's one option to think about:

IMHO, building on your solid current foundation may be a more confidence-building plan than starting from scratch.  I'd also hate for you to incur unnecessary taxes by changing too much, so let's consider the 20% cash and 7% individual stocks as what we have to play with from a reallocation perspective.  Based on your current AA, it seems like you might be a Rick Ferri Core Four type of person and that extra 27% can easily get you there.  Perhaps you should read some of Ferri's work and see if that resonates with you.  If it does, then that's probably a good place to start and you can always make incremental improvements in the future as you learn more about your needs.

I appreciate that advice Tyler.  I've read many of your posts throughout the past year and appreciate your insight.  I've seen Rick Ferri referenced in many threads, but I haven't researched his work.  I've mainly focused on JLCollins, GoCurryCracker and this forum.  I'll review Rick's stuff and let you know my thoughts.  Thanks again for your advice.

Crazycarl

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Re: A.A. once you've "made it"
« Reply #19 on: October 19, 2016, 09:50:23 AM »
Like others have said, Congrats on getting there!

my 2 cents....

I think the biggest thing you need to worry about is taxes and RMDs for the IRA with that size of a stache. Seems you will be making more than you need much later and should look to get that under control now or soon after FIREing so it doesn't hurt much more later.

Personally, I would not touch anything that is already invested as you have plenty of resources to use up and have done pretty well. If anything, maybe auto invest any dividends into a more conservative fund. Drop down to closer to 10% cash for a couple years until you have a better idea of what your true budget may be while traveling. You may find you want to travel more or less, buy a house or boat or something and that 10% cash will be a nice buffer as well as a safety margin. Enjoy!!

The last thing you want to do while traveling is worry about investments.

MustacheAndaHalf

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Re: A.A. once you've "made it"
« Reply #20 on: October 19, 2016, 10:29:31 AM »
...
50% VTI
10% VXUS (all my current income is going into International as I look to grow my int'l exposure
7% (a mix of common stock, T, BRK.B, BAC, NOC - looking to unload these into index funds, but large capital gains loom.  Will wait until Fire and being in a lower tax rate before I unload them.
10% BND
3% VNQ (REIT
20% Cash (making 1% at Barclays)

The above is roughly split 35% Rollover IRA and 65% after tax brokerage.
Generally it's hard to reach that amount of after tax brokerage without being in a high tax bracket, which means you should look at municipal (tax-exempt) bond funds.  Search for "(your state) tax exempt vanguard" to see if your state is one of Vanguard's ~5-6 state-specific tax exempt bond funds.

People earning $38k/year and $200k/year have the same long-term capital gains (LTCG) rate.  If you plan to retire with over $38k/yr, you might be retire with the same tax rate for selling stocks as you do now.  If your income is betweek $38k and $200k, I'd suggest selling enough stocks to bring your gains up to $200k.  After $200k the "net investment tax" of 3.8% kicks in and you pay 18.8% on LTCG. 

As you sell individual stocks, I'd suggest putting that money towards VXUS (Total International) as well as the new money you invest.  One disadvantage of having a lot of after-tax holdings is the momentum.  For tax reasons it's harder to make changes without paying for it.  And new contributions can't alter your percentage allocations as much.  So for the next few years you might be stuck at about 15% international, but you should aim for at least 20% international (out of your 67% stock holdings, or 13.4% of your total portfolio).

NorcalBlue

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Re: A.A. once you've "made it"
« Reply #21 on: October 19, 2016, 09:42:01 PM »
Thanks for the input everyone.  I just sold $100k of VTI today and bought $100k worth of BND.  That brings my BND portion of my N.W. to 20%.  Since I'm FIRE'ing next year for sure, I feel more comfortable with a higher Bond allocation.  That being said, 20% might be as high as I go with Bonds.  Maybe 25%.  This was all done within my Rollover IRA, which is where I keep my BND position.

DavidAnnArbor

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Re: A.A. once you've "made it"
« Reply #22 on: October 21, 2016, 06:48:41 PM »
Also, make sure to check out cfiresim.com to go over possible scenarios with different asset allocations.

NorcalBlue

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Re: A.A. once you've "made it"
« Reply #23 on: October 21, 2016, 07:54:12 PM »
Dave from Ann Arbor.  Of course I'll listen to your advice.....GO BLUE!!  I'm from just outside of Ann Arbor originally.  Ann Arbor is one hell of a town.


DavidAnnArbor

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Re: A.A. once you've "made it"
« Reply #24 on: October 21, 2016, 08:54:10 PM »
Thanks Nor Cal!!  Cfiresim.com and Tyler's portfoliocharts.com/portfolio/withdrawal-rates/ are both great tools for figuring out your asset allocation.

Ann Arbor is still hopping, but it's so hopping that giant condos are being built just a few feet from my house!

steveo

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Re: A.A. once you've "made it"
« Reply #25 on: October 22, 2016, 01:06:58 AM »
I have no idea what a golden butterfly is or what the CAPE is, nor do I care. I am an index investor and I like simple, low ERs and easy to manage, so I figured out an AA that I could live with, and invest in 3 very low fee index funds (plus a year's worth of cash) across about 9 accounts (not on purpose - mine, husband's and some inherited ones). I've been FIREd since spring of 2015, and the husband just joined me in the spring of 2016.

My current AA is roughly:

~70% - total stock market index
~15% - REIT index
~10% - total bond index
  ~5% - cash

I want to give wraps to this approach and especially the attitude behind it. My prediction is that you will outperform 98%+ of all investors as well.

DoubleDown

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Re: A.A. once you've "made it"
« Reply #26 on: October 22, 2016, 03:20:35 PM »
I'm similar to you in terms of age and finances.There was a thread a while back where we discussed the merits of "Once you've one the game, quit playing" and I agree with this approach. It turns out that being risky once you've made it typically brings little additional gain but plenty of risk.

Along those lines, one thing that's helped me greatly is to invest in safe (but low return) assets the amount needed to cover basic living expenses, factoring in all other safe sources of income you may receive such as social security or pensions. The rest is invested in stocks, real estate, etc. So, no matter what happens in the markets, I know I'll always have enough to live comfortably for the rest of my life. In all likelihood, though, the money invested more aggressively will gain over time (duh) and I'll end up with more than I need (which is proving true already despite flat markets as of late).

Simple Example: Say a comfortable lifestyle for you is $4,000 month, but $3000/month (adjusted each year to inflation) will at least cover basic living expenses. You conservatively guess you might live to age 83 (40 more years for you); Social Security at age 63 will equal $2000/month. You have 20 years to cover until you start drawing Soc. Sec. Therefore, you'd need from your own assets

($36,000 times 20 years = $720,000)

+

($12,000 times 20 years = $240,000)

= $960,000 to cover you for the rest of your life. That amount you'd invest in something like government securities and safe bonds that will not suffer during market swings. The rest of your $1.4M, or $440,000, you can invest in stocks, real estate, whatever and withdraw as you want so that you don't have to just meet "basic" living expenses. In my case the safe haven is the "G Fund" in my Thrift Savings Plan (federal government version of a 401k) that reliably returns about 2-5% annually and can never go down.

I've only been FIRE'd for a couple of years starting at age 47, but this helps me sleep at night knowing I don't need to be concerned at all with market ups and downs. Even if it ends up not being the absolutely most optimal in terms of eventual returns, I don't care. It's more than enough, and as it turns out the difference in gains between conservative and aggressive allocations is marginal or nonexistent. Lots of research shows that relatively conservative asset allocations end up performing nearly as well as aggressive allocations, but with far less volatility and risk.

Another side benefit of this approach is that because I know my basic expenses will always be covered by the safe investments, any gains in the other investments are mine to withdraw and use as I please whenever I want -- I don't need to keep it in reserve to cover future down markets (an ever-present concern with straight SWR withdrawals, i.e., "Will my portfolio last??"). It's been nice knowing I can afford an extra trip or to buy something I want without wondering, "Should I have preserved this money in case I can't meet expenses down the line after a really bad and long market downturn?"

arebelspy

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Re: A.A. once you've "made it"
« Reply #27 on: October 23, 2016, 02:40:56 AM »
http://forum.mrmoneymustache.com/investor-alley/pfau-on-variable-withdrawal-strategies/

I'd be less concerned with an AA right now, and more concerned with a spending model, if I were you.  Pick a solid AA (60/40, PP, whatever floats your boat), and stay the course.

As far as spending models...

Ideal Budget:   Expand it as much as possible without compromising my stache.  Not "mustachian" I know, but as long as I'm being "safe", I'd like to expand the budget as much as I can (lots of travel planned moving forward)

1) VPW immediately came to mind.  I'm not typically a fan of the variable spending model for most retirements, as I find it way too volatile for most people (they can't cut expenses by 50% one year to the next, when necessary, but it seems pretty perfect for someone like you, with low base expenses and a desire to spend more when available.

https://www.bogleheads.org/wiki/Variable_percentage_withdrawal
http://forum.mrmoneymustache.com/investor-alley/variable-percentage-withdrawal-(vpw)/

Be sure to read the criticisms of it, too.  I offer plenty here:
http://forum.mrmoneymustache.com/post-fire/playbook-on-down-marketsportfolio-steps/

2) Another thing I'd check out is the Pfau article linked here, and the discussion on it from this thread:
http://forum.mrmoneymustache.com/investor-alley/pfau-on-variable-withdrawal-strategies/

3) Finally, check out this thread:
http://forum.mrmoneymustache.com/ask-a-mustachian/planning-for-a-6-withdrawal-rate-am-i-crazy/

It has a fantastic spreadsheet.  The idea is get a baseline level of minimum spend, then many years you can spend even more (if market is up), and cut expenses when market is down.

That's probably the most useful of all, IMO, for your situation.

I know I went off on something not directly on what you were asking--asset allocation--but it's because I believe the AA is not that important.  Your base withdrawal is so low (24k on 1.4MM = 1.7% WR) that any AA should be fine--one with more volatility (and higher CAGR) like 90/10 will serve you fine, one with less volitility but lower CAGR, like GB will be fine, too.  So what I'd be looking at, in your case, is spending strategies. 

I'm assuming you've run across some of the above, given how thoroughly you've researched AAs, but maybe one or two things there will be new, or at least give you a chance to revisit and refresh yourself. 

Enjoy!
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mathjak107

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Re: A.A. once you've "made it"
« Reply #28 on: October 23, 2016, 04:13:44 AM »
a good variable spending plan does not require  you to cut as much as markets  fall . i use bob clyatt's 95/5 method .  each years max draw is 4% of that years balance . but if markets are down all you need is to take which ever is higher , the 4% of the balance or what you took the previous year less 5% .

it works great , has back tested 100% out to 40 years and is a way of setting higher goal posts when we are up but not taking huge spending cuts when we are down .

only reason it stops at 40 years is that is as far as bob ran the numbers .

this is what we do . we may not spend that much but it does establish the goal posts .
« Last Edit: October 23, 2016, 04:17:48 AM by mathjak107 »

NorcalBlue

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Re: A.A. once you've "made it"
« Reply #29 on: October 23, 2016, 09:00:58 AM »
http://forum.mrmoneymustache.com/investor-alley/pfau-on-variable-withdrawal-strategies/

I'd be less concerned with an AA right now, and more concerned with a spending model, if I were you.  Pick a solid AA (60/40, PP, whatever floats your boat), and stay the course.

Thanks very much arebelspy - I've read many of your posts in other threads and appreciate your feedback.  I agree with you regarding VPW.  I think it's perfect in my case (I know you're not generally a big fan of it based on other threads).  But for me, being single, with a low "needed" spend rate, I think it makes perfect sense.  As MathJak suggested, a VPW with a floor and a ceiling seems to be the way to go.

Regarding allocation - I still haven't firmed up my position.  I think I'll get to 65/25/5/5 by year end and in the meantime continue to do research until I reach a firm decision.  One thing I keep pondering though:  given my situation, I really wonder if a more aggressive strategy is the way to go.  I'm single, with an inheritance, SS and a small pension all coming my way in the next 20-25 years.  Couple that with a low "required" spend rate and a willingness to use a VPW and it really seems like I could simply things by going all stocks.  The dividends alone would more than cover my required spend.  If CAPE was sitting in the mid teens, I'd pull the trigger on the VPW/All Stock plan right now.  However, I feel my portfolio is somewhat artificially inflated due to monetary policy so why not take some off the table and park it in BND.  I realize the last two sentences are in the market timing category, but current valuations are a concern of mine.

The other thing I need to figure out is taxes moving forward.  It's such a convoluted (sp?) topic.  I've done some research (roth conversion ladder for example), but I need to develop a firm plan as I head into FIRE.

Anyway, all good problems to have and I really enjoy the process of gaining investment knowledge.  Thanks again for everyones input, links and suggestions.  It's been very  helpful
« Last Edit: October 23, 2016, 09:04:41 AM by NorcalBlue »

arebelspy

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Re: A.A. once you've "made it"
« Reply #30 on: October 23, 2016, 09:07:06 AM »
Regarding allocation - I still haven't firmed up my position.  I think I'll get to 65/25/5/5 by year end and in the meantime continue to do research until I reach a firm decision.  One thing I keep pondering though:  given my situation, I really wonder if a more aggressive strategy is the way to go.  I'm single, with an inheritance, SS and a small pension all coming my way in the next 20-25 years.  Couple that with a low "required" spend rate and a willingness to use a VPW and it really seems like I could simply things by going all stocks.  The dividends alone would more than cover my required spend.  If CAPE was sitting in the mid teens, I'd pull the trigger on the VPW/All Stock plan right now.  However, I feel my portfolio is somewhat artificially inflated due to monetary policy so why not take some off the table and park it in BND.  I realize the last two sentences are in the market timing category, but current valuations are a concern of mine.

You have enough, you can afford to be slightly inefficient... just don't do it for 40 years.  ;)

Having something like 50/50 until a market crash, or stagnation to a more reasonable CAPE, or whatever, then going to 100% stocks seems like it could work fine, and even that AA isn't really risky at all.  I'd be wary of too much cash or nonproducing assets, but otherwise, if you want to lower the equity exposure for a bit, that's probably not too dangerous.  I'd put written rules in your IPS, because otherwise it may make it hard to pull the trigger when the sky is falling (or you may want to see it go just a bit lower, and miss it).

In other words, I think the market timing you're proposing is sub-optimal, but you're so far ahead in the race, you can afford a bit of sub-optimal right now, so if that's what you want to do, do it.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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Metric Mouse

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Re: A.A. once you've "made it"
« Reply #31 on: October 23, 2016, 06:13:16 PM »
a good variable spending plan does not require  you to cut as much as markets  fall . i use bob clyatt's 95/5 method .  each years max draw is 4% of that years balance . but if markets are down all you need is to take which ever is higher , the 4% of the balance or what you took the previous year less 5% .

it works great , has back tested 100% out to 40 years and is a way of setting higher goal posts when we are up but not taking huge spending cuts when we are down .

only reason it stops at 40 years is that is as far as bob ran the numbers .

this is what we do . we may not spend that much but it does establish the goal posts .

Interesting. I'm not usually a fan of such 'rigidly flexible' withdrawl plans, but it doesn't seem like that much of a change (5% in a down year) that it might be worth looking into, since it back-tests so well.

Interest Compound

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Re: A.A. once you've "made it"
« Reply #32 on: October 23, 2016, 10:06:45 PM »
Good problem to have, but I'm really struggling with deciding an appropriate asset allocation given my situation and hoping to get some opinons.  Here's where I'm at:

$1.4M "invested" NW
Current A.A: 65, 12, 3, 20 (Stock, Bond, REIT, Cash).  I know Cash is way to high - looking to get that allocated ASAP.
No debt, single
Renter
No debt
Age:  43
Currently doing some consulting - I'd consider myself semi-FIRE, with the intent of going full FIRE next year.
Basic needs expense budget:  $24k annually
Ideal Budget:   Expand it as much as possible without compromising my stache.  Not "mustachian" I know, but as long as I'm being "safe", I'd like to expand the budget as much as I can (lots of travel planned moving forward)

I've read it all.  Glide paths, 60/40, Golden Butterfly, 100% stock, etc. etc.  I'm planning to go full FIRE in 2017 and need to decide on an appropriate A.A. moving forward.  I will say that a VWR is appealing to me given my lifestyle.  If CAPE was in the mid teens, I think I would go 100% stock with a VWR @ 4% of the annual balance and be done with it.  But with a CAPE in the high 20's I'm having trouble pulling the trigger on that plan.  Sequence of returns also gives me pause on the 100% stock A.A. given CAPE levels.

Anyway, just hoping to get some thoughts on what fello mustachians might do given my situation?

I'm loving life right now and can't wait for next year to start the next chapter.  This is a great "problem" to have and I feel blessed. Thanks for your help.

I see you've made a new thread on this, I'll give the same answer I just gave in the 100% stock thread.

If I were in your shoes, I wouldn't delude myself into thinking my knowledge of a single publicly-available metric (CAPE) allows me to predict future returns better than those who have access to that same information (and more).

I'm not too far off from your situation, and my answer is 100% world cap-weighted stocks, with a VPW withdrawal. Volatility is only temporary, but you can permanently cripple your portfolio trying to avoid it.

mathjak107

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Re: A.A. once you've "made it"
« Reply #33 on: October 24, 2016, 03:14:53 AM »
a good variable spending plan does not require  you to cut as much as markets  fall . i use bob clyatt's 95/5 method .  each years max draw is 4% of that years balance . but if markets are down all you need is to take which ever is higher , the 4% of the balance or what you took the previous year less 5% .

it works great , has back tested 100% out to 40 years and is a way of setting higher goal posts when we are up but not taking huge spending cuts when we are down .

only reason it stops at 40 years is that is as far as bob ran the numbers .

this is what we do . we may not spend that much but it does establish the goal posts .

Interesting. I'm not usually a fan of such 'rigidly flexible' withdrawl plans, but it doesn't seem like that much of a change (5% in a down year) that it might be worth looking into, since it back-tests so well.

i like it because it is dynamic based on what is happening . we do not actually spend that much but we know we could so each year we set a side the years spending cash based on that number  . the balance each year is dependent on inflation so inflation adjusting is also built in indirectly and no other adjustments have to be considered .

Livingthedream55

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Re: A.A. once you've "made it"
« Reply #34 on: October 27, 2016, 11:17:54 AM »
Once I've "made it" - either 2 or 3 years from now - my A.A. plan is as follows:

50% - total stock market index fund via Vanguard (VTSAX) expense ratio .05% annually
45% - total bond market index fund via Vanguard (VBTLX)  expense ratio .06% annually
5% - cash in the Vanguard Federal Money Market Fund (VMFXX) expense ratio .11% annually

In addition, I plan to hold an additional $40,000 - one year’s living expenses in cash in a bank savings account (maybe a CD) - as an emergency buffer AKA – “S*it Hits the Fan” money

Info on historical returns on 50/50 A.A.

http://awealthofcommonsense.com/2014/04/whats-worst-10-year-return-5050-stockbond-portfolio/               Ben Carlson, A Wealth of Common Sense Blog

“The stock market is designed to transfer money from the active to the patient.” – Warren Buffett


Interest Compound

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Re: A.A. once you've "made it"
« Reply #35 on: October 27, 2016, 11:39:02 AM »
Once I've "made it" - either 2 or 3 years from now - my A.A. plan is as follows:

50% - total stock market index fund via Vanguard (VTSAX) expense ratio .05% annually
45% - total bond market index fund via Vanguard (VBTLX)  expense ratio .06% annually
5% - cash in the Vanguard Federal Money Market Fund (VMFXX) expense ratio .11% annually

In addition, I plan to hold an additional $40,000 - one year’s living expenses in cash in a bank savings account (maybe a CD) - as an emergency buffer AKA – “S*it Hits the Fan” money

Info on historical returns on 50/50 A.A.

http://awealthofcommonsense.com/2014/04/whats-worst-10-year-return-5050-stockbond-portfolio/               Ben Carlson, A Wealth of Common Sense Blog

“The stock market is designed to transfer money from the active to the patient.” – Warren Buffett

The problem I have with articles like that, is their focus on nominal returns. Maybe nominal returns are easier to handle emotionally, or maybe the author wanted to keep things simple. I'm not sure, but one thing is clear, if you can't handle the volatility of more stocks, there's a hidden price you'll have to pay. Inflation. I fear inflation more than I fear volatility. Inflation is certain and permanent. It seems the safest inflation-adjusted rolling 10 year returns were from an 80/20 portfolio:

Money illusion: Why bonds? See S&P 500 & 10y T-bond returns, 1871-2015

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This seems like another example of possibly crippling your portfolio permanently, trying to avoid some temporary volatility.

mastrr

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Re: A.A. once you've "made it"
« Reply #36 on: October 27, 2016, 08:51:46 PM »
Tell us about your journey to get to where you are.

Did you consciously choose to rent over buy your home?

What are the cornerstones of your financial success?

I ask because I currently rent and my spending is very close to yours.

NorcalBlue

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Re: A.A. once you've "made it"
« Reply #37 on: October 27, 2016, 11:17:10 PM »
Tell us about your journey to get to where you are.

Did you consciously choose to rent over buy your home?

What are the cornerstones of your financial success?

I ask because I currently rent and my spending is very close to yours.

Hmm.  Thanks for asking. 

1. Got a degree in Finance
2. Middle income parents paid for degree - came out of college slightly in the black.  Lucky and blessed
3. Pushed myself to semi-excel at a career I wasn't particularly fond of (financial software consulting) because there was good money in it.
4. Lived WAY below my means, didn't get married and have kids (nothing against those things, it just didn't happen...not yet anyway) and invested (although not very well until the last 4-5 years).

Regarding housing - yes, I consciously decided to rent.  I've lived in an in-laws quarters for 12 years (omg) that's a mile from my place of employment.  It's $685 per month, in California, including utes and it's really nice...small, but nice.  This place has been a huge reason why I've been able to sock away as much as I have.

Anyway, bottom line, the cornerstones have been purely mustachian.  Lived below my means, NO DEBT EVER and invested the difference.  My ego cost me a lot of $ in terms of investing when I was younger - I thought I could beat the market.  No surprise...I couldn't.  I found this site, JLCollins and GoCurryCrakcer a few years ago and it changed my approach.  A little humility goes a long way - I'd be worth double what I am now if I had the knowledge (and discipline) of JLCollins stock series when I was younger.

I'm back to consulting for the company that laid me off two years ago.  I'm socking away every dime.  But I'm going to be done for good in a few months.  I have the perfect work situation right now:  great boss, easy gig and really good $$.  But it's still corporate B.S.  It bores me now.  I find myself walking away from people at work that want to talk office politics.  I want to kill myself in meetings.  I'm a grunt now and I'm still in 4 meetings a day.  WTF.  Done with it.  Just done.

Really looking forward to the next chapter. So glad I found the early retirement community on the net - for years I thought I was the only one that wanted to retire ASAP!!   

« Last Edit: October 28, 2016, 07:44:18 AM by NorcalBlue »